Asia FX muted, dollar falls from 3-week high amid rate-cut uncertainty

Asia FX muted, dollar falls from 3-week high amid rate-cut uncertainty

Regional currencies marked a weak start to the year as markets questioned the potential for early interest rate cuts by the Federal Reserve. This uncertainty was exacerbated by data showing resilience in the U.S. labor space, which gives the Fed less impetus to begin loosening policy early.

While Asian currencies saw some relief this week, they were still trading largely lower for 2024, after a middling performance in 2023.

Several inflation and economic readings from Asia are also on tap this week- anticipation of which kept buying into regional units limited.

The Japanese yen rose 0.4% as data showed inflation in Tokyo fell closer to the Bank of Japan’s 2% annual target range in December. The BOJ has signaled that it will begin tightening its ultra-dovish policy only after the 2% target is achieved.

But the yen was nursing steep losses in the first week of 2024, as investors bet that rebuilding efforts in the wake of a devastating earthquake in central Japan will delay the BOJ’s plans for a pivot.

The Australian dollar rose slightly as data showed a bigger-than-expected jump in retail sales in November. The reading likely heralds some strength in a consumer price index (CPI) inflation reading for the month, which is due on Wednesday.

The Chinese yuan fell 0.1%, as sentiment towards China showed little signs of improving. Inflation data due this Friday is expected to show a continued deflationary trend in the country, while trade data is likely to show sustained weakness in its export engines.

The South Korean won tread water before a Bank of Korea meeting later this week, where the central bank is widely expected to keep rates steady.

The Indian rupee was muted after central bank intervention helped the currency recover sharply from near record lows over the past week. Indian CPI data is also due this Friday, and is expected to show further easing in inflation.

The dollar index and dollar index futures steadied in Asian trade on Tuesday after falling from three-week highs in the prior session, as uncertainty over rate cuts in 2024 spurred some profit-taking.

But the greenback still retained a bulk of its gains made over the past week, as investors favored the dollar before key CPI inflation data due this Thursday. The reading is expected to show a mild increase in inflation which, coupled with last week’s strong nonfarm payrolls data, casts doubts on bets that the Fed will cut rates by as soon as March 2024.

Fed officials also pushed back on bets on early policy easing. Atlanta Fed President Raphael Bostic said on Monday that with inflation still above the Fed’s 2% target, his bias remained towards tighter policy in the near-term.

While he still expects rates to fall eventually in 2024, he expects them to fall by a total 50 basis points- a much a smaller margin than markets are hoping for this year.

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